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US bank earnings quick take: JPM beats
JPMorgan: Q3 EPS of $2.92 beat expectations for $2.35 on revenues of $29.95 vs the $28.39bn expected. Net income came in at $9.4bn, vs $4.7bn in the second quarter, with the doubling the result of much lower provisions for credit losses.
JPM had added $15bn in the first half but there has been a significant slowing in loan loss provisioning as the economy steadied and both fiscal support and targeted actions by the Federal Reserve reduced default rates. Fee income beat expectations and rose 7%. Non-interest expenses are higher than expected.
Return on equity rose to 15% from 7% in the prior quarter and back to where it was in Q3 2019. Return on tangible equity rose to 19% from 9% in Q2, and ahead of the prior year’s 18%.
How did trading revenues hold up?
- Pretty well, markets and securities revenues +29% to $7.8bn, fixed income trading +29% to $4.6bn, equities trading revenues +32% to $2bn. Total markets revenues +30%. Investment banking revenues +12% to $2.1bn.
Have loan loss provisions worsened?
- No, Q3 provision for credit losses of $0.61bn was well short of the $2.38bn expected. There is hope that having set aside large amounts already, JPM and others are past the peak, even if the economic situation deteriorates. The question for the shares is whether the market believes this optimistic assessment or whether there are deeper losses in the offing.
How are ultra-low rates affecting core business?
- Badly, net interest income was down 9% at $13.1bn. The effect of the Fed’s ZIRP and QE ad infinitum continues to exert a drag on interest income and margins.
Anything else of note?
- Americans are saving – average deposits rose 28%, while loans were –7% and credit sales –8%. The economy will require this trend to reverse to get moving again. Consumer banking income was down 9% at $3.9bn.
- Company launching new account for kids as young as 6.
Shares: +1.77% in pre-market to $104.25 north of the 200-day EMA, which it has not managed to hold a push above since Feb. Read across lifting the other big banks ($GS, $WFC, $MS) Citigroup reports soon.
Three reasons why the next move in the S&P 500 may be lower
Following a March 23 move to lows around 2180, the S&P 500 recovered to trade at highs near 2973 at the end of April. With the market 160 points lower than this swing high at time of writing, we wanted to outline several reasons why the next leg for the index may be lower.
It may not be a single event that leads to a pullback, but rather a combination of many, including:
1. The reopening process may take time
The index fell sharply in the final hour of trading Tuesday, on the news that Los Angeles County’s stay home order would be extended “with all certainty” for another three months, while Dr Fauci warned of the risks of reopening businesses too early.
This saw the S&P 500 fall 2% and close at the session low at 2870, a move that was continued yesterday, testing the 2790 level at the lows.
2. A resurgence of US-China tensions
A leading cause for investor concern in 2019 was the US-China trade relationship, which is again showing signs of increasing tensions. There have been recent comments from both sides, with Chinese media reporting on calls rising in China to rework the deal with the US and US media reporting that the White House has directed the federal pension fund to halt investments in Chinese stocks.
Ratcheting up the rhetoric from here could lead to this issue once again coming to the forefront of investor minds.
3. Dividends and share buybacks at risk
Share buybacks, reducing the number of shares outstanding and increasing the value of those that remain, have been the only net demand for shares in the past decade. However, many firms have now stopped their buyback programs to preserve liquidity. Similarly, to preserve cash, many firms have suspended or reduced their dividend payments.
Both developments could negatively impact the demand for shares and prices.
Companies pull guidance as COVID-19 chaos reigns
A slew of leading US companies have pulled their guidance today, blaming the uncertainty caused by the coronavirus outbreak. What else do the latest earnings reports tell us about the stocks?
Chipotle beat earnings estimates by $0.18 after reporting earnings per share of $3.08 for the first quarter. Revenue clocked in around expectations at $1.41 billion, as a surge in online orders helped to soften the blow from the closure of around 100 restaurants in locations such as shopping centres.
Despite pulling its guidance, the company has announced plans to help it adapt to the changing conditions, which include improving its mobile app, partnering with more delivery companies (and making delivery free), and shifting ad spend from live sports events to online, such as streaming platforms.
Executives have also said that diminished competition for real estate is helping the company secure better sites for future restaurants, even as it delays work on some of the 165-odd locations it had planned to open this year.
Shares are up around 10%.
Shares in AT&T are drifting lower today after the company’s latest earnings report. Not only did the company pull its guidance, it also missed EPS expectations by a cent and reported revenue of $42.8 billion against forecasts of $44.2 billion.
The first quarter saw a surge in new phone subscribers, despite over 40% of its retail stores having to shut. Premium TV subscribers slumped by 897,000. The company estimates that the pandemic has hit EBITDA by $435 million.
Although guidance is out of the window, the company stated that it has enough free cash flow to make its debt payments and to pay dividends.
Quest Diagnostics has jumped 4% today after the company said that it had begun testing in its medical labs for COVID-19 antibodies, using tests from Abbot Laboratories and PerkinElmer. Earnings came in 5 cents above expectations, but revenue was 3.6% lower at $1.82 billion. The company expects to be able to perform over 200,000 antibody tests per day by the middle of next month. While guidance has been pulled, dividends are unaffected.
Earnings for Kimberly-Clark came in well-above expectations at $2.13 per share, versus consensus expectations of $1.97. Revenue was up as well, topping $5 billion against expectations of $4.86 billion, as consumers stocking up on essential items pushed organic sales up 11%.
The stock has slipped around 1% lower today.
Lyft earnings aren’t due until May 6th, but the company has already followed its larger rival Uber in pulling its 2020 guidance. The company had been aiming to finally turn profitable this year, but the coronavirus pandemic has crushed those forecasts. Driver bookings are down around 75% in recent weeks.
‘The pandemic began to have a negative impact on business trends, including ride volumes, in mid-March, which has continued into April,’ Lyft said yesterday.
The May 6th earnings will detail the measures the company is taking to safeguard its financial position and reduce costs, while supporting both drivers and riders.
ExxonMobil (XOM) dividends at risk as oil futures crash?
US oil stocks are slumping in premarket trading today, as the continuing chaos for crude oil futures hammers the outlook for the world’s major energy companies. ExxonMobil (XOM) has dropped 3%, while Chevron (CVX) has slid 4%. Across the pond, FTSE-listed BP is down 4%, while Royal Dutch Shell is off 4.7%.
ExxonMobil, the largest publicly-traded US oil company, has already made some sweeping adjustments to its operations in order to cope with the turbulent market conditions as COVID-19 shutters businesses across the globe and slams the brakes on the world economy.
The company recently announced that it would cut its capital expenditure target for 2020 by 30% – equivalent to $10 billion – to $23 billion. It’s the company’s lowest capex budget for four years. On April 13th the company took advantage of improving sentiment in the debt market and raised $9.5 billion by selling bonds dated between five and 31 years at lower yields than when it tapped the debt markets three weeks prior.
But these were moves designed to help the company weather the impact of crashing oil prices before the huge dislocation in the futures market this week. With the company’s earnings due for release on May 1st and an announcement over dividends expected a few days prior, investors are questioning whether ExxonMobil can still afford to make its payouts.
ExxonMobil to cut dividends for first time in 37 years?
ExxonMobil is one of the S&P 500’s ‘Dividend Aristocrats’ – companies who have raised their dividends for at least the past 25 years. In fact, Exxon has hiked the dividend for 37 years straight, even though its organic cash flows do not cover the payments. Last year the company had $3 billion in free cash flow, while paying $14.7 billion in dividends.
JPMorgan recently estimated that Exxon would need Brent to be trading at $81 per barrel in order to be able to organically cover its dividend costs. Brent is currently trading at a quarter of that level. Its major competitors require Brent at $63 a barrel to meet their current dividend commitments.
XOM currently has a dividend yield of 8.25%. CEO Darren Woods stated at the beginning of April that he was committed to maintaining the dividend, but crude oil is now trading around $9 lower than when he made those comments.
Exxon borrowed money to finance its dividend payments last year, but this isn’t a sustainable plan in the long-term. The company’s credit rating has been cut by Moody’s and S&P in the past few weeks. The problem is, until recently analysts were talking about financing the dividend through borrowing and asset sales as being unstainable over a period of years, but current conditions have made these much more pressing questions.
XOM analyst ratings and price targets
XOM, Analyst Recommendations, Marketsx – 12.30 UTC, April 21st, 2020
XOM currently has a “Neutral” rating, according to our Analyst Recommendations tool, which shows that the majority of analysts rate the stock a “Hold”. The price target of $50 represents an upside of 21% from yesterday’s closing pricing (April 20th).
XOM, Hedge Fund Confidence, Marketsx – 12.35 UTC, April 21st, 2020
Meanwhile, hedge funds are bearish on the stock, having sold 31 million shares during the previous quarter.
Oil leads global market tumble on ‘Black Monday’
The collapse of OPEC+ talks over the weekend tipped markets into chaos on Monday. Traders, already on edge due to the unfolding coronavirus epidemic, were sent fleeing to safety after Saudi Arabia slashed its crude oil prices.
Crude and Brent tumbled over 30%, their worst daily performance since the Gulf War, hitting lows below $27.50 and $31.50 respectively. The Kingdom cut prices for April crude by 30% and stated that it intends to raise its output above 10 million barrels per day. Talks at the weekend saw OPEC and its allies fail to agree new terms for an oil production cut; OPEC+ couldn’t even agree to extend the current level of cuts, let alone deepen the cuts to battle the hit to demand from the coronavirus outbreak.
Saudi Arabia is well-positioned to weather weak prices and Russia claims it can withstand the pressure for up to a decade. US shale oil producers, who have flooded the global market with oil to take advantage of supported prices and are heavily debt-laden, could be in dire trouble.
Global equity markets have been sent tumbling. The collapse in the oil markets, combined with news that the Italian government has imposed travel bans on 16 million people, sent investors running from stocks.
US futures went limit down after triggering circuit breakers during the Asian session. After a 5% drop the Dow was indicated to open down over 1,300 points, but based upon the ETF market – which is not suspended – the Dow was looking at a drop of 1,500. Asian stocks took a hammering, with the Hang Seng and the Nikkei both closing over 1,100 points lower.
European equities sank as well, with the DAX, and Euro Stoxx 50, all off around 7%. The FTSE 100, also down 7% to test 6,000, was trading at levels not seen since the immediate aftermath of the Brexit referendum.
Stocks most at risk
While stocks across the board tanked, several industries were hit harder than others.
Oil majors slumped. BP (LSE) tumbled 20%, ExxonMobil dropped 17%, Chevron tumbled 16%, and Occidental cratered 38% – all in pre-market trading on the NYSE – while Royal Dutch Shell fell 14%.
Airlines were hit hard as well after the price slump left them sitting on big losses after hedging oil at higher prices. American Airlines, Delta Airlines, Southwest Airlines and United Airlines were all down 5-6% in the pre-market.
Coronavirus fears weighed on tech stocks. The FAANGS all recorded losses in the range of 6-7%, but cruise ship operators were hit harder. The US government warned American citizens not to go on cruises. Carnival – the company that owns many of the ships currently stranded due to on-board quarantines – dropped 10%, Norwegian Cruise Lines tumbled 11%, and Royal Caribbean Cruises slumped 12% – all before the markets opened.
New record lows for US bonds
The flight to safety drove the yield on US government debt down to record lows. Yields move inversely to prices. The yield on the US 10-year treasury bond fell to 0.32% while the yield on the 30-year treasury note fell towards 0.7%, breaching 1% for the first time in a year.
Gold traded around $1,673 after hitting $1,700 over the weekend.
Cryptos join in with global market chaos
The cryptocurrency market is no stranger to volatility. The world’s largest cryptocurrencies were down around 10-15%, with Bitcoin falling below $8,000.
Week Ahead: OPEC meets, Caixin PMI to reveal coronavirus impact
OPEC to the rescue, Democrats approach Super Tuesday, US Nonfarm Payrolls and more on Covid-19
Welcome to your guide to the week ahead in the markets. Watch the latest week ahead video in XRay on the platform now.
OPEC to the rescue?
Oil has been hammered as the coronavirus forced factories across China to cease production and grounded flights across the globe. China is coming back online now, but crude inventories have been building amid the demand drop-off and we could be facing shutdowns in other parts of the world if the virus continues to spread.
Crude and Brent fell to their lowest levels in over 12 months last week, but hope remains that OPEC will ride to the rescue when it meets on Thursday and Friday. The current pact to cut production by 1.7 million barrels per day expires at the end of this month. There is talk of extending the deal and cutting production by another 600,000 barrels per day, but it is uncertain whether cartel ally Russia will agree to such a move.
Chinese manufacturing came back online towards the end of February, with travel data showing a larger-than-expected number of workers were able to leave their hometowns and return to work after the extended Lunar New Year holiday. The number of people travelling at the end of the month was still well below usual post-holiday levels, however. Even businesses that have reopened are facing labour shortages, supply chain disruptions, and weak demand. This week’s Caixin Manufacturing PMI will be a key measure as economists slash growth expectations and markets look for clues over how severe the economic impact of a large-scale outbreak in the US or Europe could be.
Democrats approach Super Tuesday
This week will give markets a clearer indication of which Democratic candidate is likely to challenge President Trump in this year’s election. 14 states are due to hold primaries on ‘Super Tuesday’. Only 100 delegates were assigned during three primaries last week, with Bernie Sanders securing almost half of those. A strong performance on Super Tuesday would cement his position as the frontrunner – the number of delegates up for grabs on Tuesday alone is around a third of the nearly 4,000 needed to secure the nomination. Bernie is the worst outcome as far as the markets are concerned due to his socialist policies, so any shift in voting towards more moderate candidates like Joe Biden could see markets breath a small sigh of relief.
US nonfarm payrolls
Usually the highlight of the economic calendar, this month’s nonfarm payrolls may not be so impactful. The monetary policy outlook is currently ruled by coronavirus headlines – markets are betting on a rate cut in April, if not this month, and a solid set of jobs numbers would be unlikely to materially shift those expectations. Markets are thinking about the potential economic impact of a large-scale Covid-19 outbreak in the US, so backwards-looking data may not settle many nerves
Heads-Up On Earnings
|2nd March – 01.45 GMT||China Caixin Manufacturing PMI|
|2nd March – 08.15-09.30 GMT||Eurozone / UK Finalised Manufacturing PMIs|
|2nd March – 15.00 GMT||US ISM Manufacturing Index|
|3rd March – 03.30 GMT||RBA Official Cash Rate Decision & Statement|
|3rd March||Beiersdorf||Q4 2019|
|3rd March – 10.00 GMT||Eurozone Flash CPI Estimate|
|3rd March – After Market||Hewlett Packard Enterprise||Q1 20202|
|4th March – 00.30 GMT||Australia Quarterly GDP|
|4th March – 07.00 GMT||DS Smith||Q3 Trading Update|
|4th March – 08.15-09.30 GMT||Eurozone / UK finalised Services PMIs|
|4th March||Legal & General||Q4 2019|
|4th March – Pre-Marcket||Dollar Tree||Q4 2019|
|4th March – Pre-Market||Campbell Soup||Q2 2020|
|4th March – 15.00 GMT||Bank of Canada Interest Rate Decision and Statement|
|4th March – 15.00 GMT||US ISM Non-Manufacturing Index|
|4th March – 15.30 GMT||US EIA Crude Oil Inventories Report|
|4th March – After Market||Zoom Video Communications||Q4 2020|
|5th March – 00.30 GMT||Australia Trade Balance|
|5th March – All Day||OPEC Meeting, Vienna|
|5th March – Pre-Market||Kroger||Q4 2019|
|5th March||Aviva||Q4 2019|
|5th March – 15.00 GMT||US EIA Natural Gas Storage Report|
|5th March – After Market||Costco Wholesale Corp||Q2 2020|
|6th March – 00.30 GMT||Australia Retail Sales|
|6th March – All Day||OPEC+ Meeting, Vienna|
|6th March – 13.00 GMT||US Nonfarm Payrolls Report|
Watch The Week Ahead on XRay
|Highlights on XRay this week:|
|Daily – 08:15 GMT|
European Morning Call Free Register
March 2nd – 15.00 GMT
The Trendsignal Podcast Free Register
March 3rd – 10.00 GMT
FXTrademark Course: Trading Strategies Free Register
March 4th – 10:00 GMT
FXTrademark Course: 10 Laws of Trading Free Register
March 6th – 13:00 GMT
Live Trade Setups with Mark Leigh Free Register
Markets still rattled by coronavirus fears after yesterday’s brutal sell-off
Investors fled to safety en masse yesterday as a spike in coronavirus cases in Italy, South Korea, and Iran raised fears that the outbreak was becoming a pandemic.
$1.5 trillion was wiped from global equity markets; the Dow recorded only its third ever 1,000 point drop, and the VIX ‘fear index’ spiked to the highest levels since January. Oil sank 4% and gold leapt to a seven-year high.
Today, the sell-off has paused, but the market is hugely indecisive.
Stocks, oil, volatile as markets await next major development
Since the European open today we’ve seen major indices like the DAX, FTSE 100, and Euro Stoxx 50 extend gains towards 1%, drop to multi-month lows, and rebound above opening levels. US stock market futures have gone from indicating a 200-point gain for the Dow on the open to minor losses, and back to signalling a positive open.
The FX market continues to see a shift towards the safety of the US dollar, although cable has managed to hold some gains despite easing back after rising to test $1.30 earlier in the session.
Gold is down around 0.8% and silver has suffered losses of more than 1.3% on profit-taking, but risk-appetite is clearly still absent as crude and Brent oil are struggling to hold opening levels. Like stock markets, the two benchmarks climbed on the open, then fell into the red, before recovering somewhat.
New coronavirus cases reported in Italy, Iran, Austria, Croatia, Tenerife
Markets are caught between buying the dips and pricing in further worrying developments. The first case of coronavirus has been reported in Southern Italy, and Austria and Croatia have reported their first cases today as well. The two Austrian cases are in the province of Tyrol, which borders Northern Italy, while the young man infected in Croatia had recently returned after spending several days in Milan.
Meanwhile, hundreds of people are being tested and many guests quarantined in a hotel in Tenerife after a case of the virus was confirmed there. Iran has also provided an update on the outbreak there: the number of cases is up to 95 and 16 people have died – the Deputy Health Minister is one of those infected.
We’ve also had a slew of companies warning that COVID-19 will impact their earnings. UK blue-chips Meggitt and Croda are weighing on the FTSE 100 after issuing warnings over the impact of the virus upon their businesses.
Markets may gain more direction when the US markets open, but even then uncertainty looks to be the order of the day.
US and Eurozone spending and confidence, Best Buy earnings
Welcome to your guide to the week ahead in the markets.
Has COVID-19 peaked?
Markets will of course remain susceptible to news surrounding the COVID-19 outbreak over the coming week. The number of new cases recorded daily had slowed towards the end of last week, but an outbreak in South Korea reignited fears of a global spread. Over 75,000 cases and more than 2,100 fatalities had been reported by the end of the week. An acceleration of cases outside of China could prompt further flights to safety, but otherwise the market seems relatively confident that the outbreak is contained and that stimulus from Beijing and the PBoC will soften the economic hit.
US GDP, durable goods, personal spending
Members of the Federal Reserve were feeling confident about the state of the US economy during their last policy meeting, according to last week’s minutes. The FOMC thinks the outlook has gotten “stronger”, and the coming week offers plenty of data to either challenge or support that view. CB confidence is expected to have ticked higher in January, durable goods orders to have fallen –2%, and core PCE to remain stable on the month. While personal income growth is predicted to have risen, spending is likely to have weakened. A second estimate of Q4 GDP is likely to hold steady at 2.1%.
Eurozone, Germany confidence, flash inflation
The euro could be facing more headwinds this week after sliding to multi-week lows against the pound and multi-year lows against the dollar last week. Sentiment data from Germany and the bloc is expected to soften, mirroring market concerns over the health of the bloc’s economy following some poor industrial data. Flash inflation figures for the Eurozone and Germany are unlikely to make inspiring reading; even if price growth in Germany has strengthened towards the ECB target again, the wider Eurozone reading remains far behind.
Earnings: Best Buy, Bayer
Best Buy reports earnings before the open on February 27th. The stock has put in a strong performance over the last six months, rallying around 40% compared to 15% gains for the retail-wholesale sector and 18% for the S&P 500 index during the same period. Best Buy has delivered 11 earnings beats in the past 12 quarters and beat expectations by over 9% in each of the past two quarters.
Bayer also reports earnings on the 27th. The stock is up 45% from the June 2019 low of 51.90, and was last trading around 75.00.
FTSE in focus on deluge of FY results
Earnings reports will be a key driver of UK stocks over the coming days. A deluge of full-year results for 2019 from blue-chips including Standard Chartered, British American Tobacco, Rio Tinto, Persimmon, Taylor Wimpey, RSA Insurance and Meggitt provide clear risks for the FTSE 100 index over the coming sessions. A slew of reports from FTSE 250 constituents throughout the week could also affect the general sentiment around UK plc.
Heads-Up on Earnings
The following companies are set to publish their quarterly earnings reports this week:
|24th Feb – 09.00 GMT||German IFO Business Climate Index|
|24th Feb||Associated British Foods Pre-Close Trading Statement|
|25th Feb – 12.00 GMT||Manchester United||Q2 2020|
|25th Feb – Pre-Market||Home Depot||Q4 2019|
|26th Feb – 06.00 GMT||Rio Tinto||Q4 2019|
|26th Feb – 08.00 GMT||Danone||Q4 2019|
|26th Feb||Taylor Wimpey||FY 2019|
|26th Feb – Pre-Market||Lowe’s Companies||Q4 2019|
|26th Feb – 15.30 GMT||US EIA Crude Oil Inventories|
|27th Feb – 00.30 GMT||Australia Private Capital Expenditure|
|27th Feb – 04.15 GMT||Standard Chartered||Q4 2019|
|27th Feb – 06.30 GMT||Bayer||Q4 2019|
|27th Feb||Persimmon||Q4 2019|
|27th Feb||RSA Insurance||FY 2019|
|27th Feb – 10.00 GMT||Eurozone Sentiment Survey Results (Consmer, Business, etc)|
|27th Feb – After-Market||Autodesk||Q4 2020|
|27th Feb – 13.30 GMT||US Q4 GDP 2nd Estimate, Durable Goods Orders|
|27th Feb – 15.30 GMT||US EIA Natural Gas Storage|
|27th Feb – Pre-Market||Best Buy||Q4 2020|
|28th Feb – 10.00 GMT||Eurozone Preliminary Inflation|
|28th Feb – 12.30 GMT||US PCE Index, Personal Spending, Personal Income|
|28th Feb – 13.00 GMT||Germany Preliminary Inflation|
European equities rise as China eases
Police in Hong Kong are investigating an alleged toilet paper heist, amid a shortage due to the coronavirus outbreak. Things are bad when loo roll becomes currency.
It’s a dull old session out there today: European shares were a little indecisive at the start of play following a mixed bag overnight in Asia, but are leaning higher with stimulus from China helping to lift the mood. Basic resources stocks were among the biggest gains on the FTSE as the blue chip index moved to try to reclaim the 7500 level, last some way short at 7445.
Shares in Hong Kong and Shanghai advanced as China cut a key medium-term interest rate, while Tokyo shares slipped on growth concerns. Markets are betting this will be only a part of a wider stimulus programme to offset the economic damage wrought by the Covid-19 coronavirus – the PBOC has already been injecting liquidity and there will no doubt be more to come. China reported another 2k cases by Sunday night, taking the total to more than 70k.
US stocks finished higher for the second straight week. Markets in the US will be closed today for Washington’s birthday but have rolled into the holiday in fine fettle. Industrial productions were weak, down 0.3% in January, largely down to Boeing. Ex-aircraft production, factory output rose 0.3%. Retail sales showed the US consumer started the year in decent shape, with headline sales +0.3% month on month.
There are growing fears about the economic impact. Japan’s economy shrank at the quickest pace in six years in the last quarter of 2019 – down 6.3% as the consumption tax hike hobbled the economy far worse than thought.
Most think to hit to tourism and exports resulting from the outbreak will mean the economy contracts again in the March quarter, pushing Japan into recession. Meanwhile Singapore has slashed its growth outlook for 2020.
Oil is higher above $52, having closed last week well. Look like a base has been formed at $50, looking to cement gains north of last week’s highs at $52.2.
In FX, there are tentative signs of stabilisation and basing for EURUSD. Speculators have not been this net short since Jun 2019, with net shorts at nearly 86k, contracts so the short-euro trade is very crowded. As ever this CFTC data is a week old so I wouldn’t be surprised if the next set of data showed deeper net shorts towards 100k corresponding to the dove under 1.0880. The inverted hammer on Friday suggests near term reversal but until 1.09 is reclaimed the bears remain in control.
Sterling is giving a gallic shrug to some French fighting talk vis-à-vis Brexit trade talks. GBPUSD is steady at 1.3040, with support at 1.30 and near-term resistance seen at the 50-day moving average at 1.3070.
Apple Q1 earnings preview: Spotlight on China, 5G, Wearables, Services
Apple (AAPL), which reports fiscal 2020 first quarter earnings today after the close, has declined somewhat from its all-time highs in the last couple of sessions, but the stock is still up by around 100% since its profits warning a year ago. Over that time we have seen a massive rerating in the stock despite fears iPhone sales are not going to be what they once were. This is largely down to one thing – Services. But there is also a sense that iPhone sales are going to be materially higher than feared a year ago, and with the 5G refresh cycle promising to be a super-cycle, there is plenty of fundamental support for shares to be trading where they are.
Fiscal Q1 earnings per share are expected at $4.55, from $4.18 a year before, on revenues of $88.4bn, from $88.3bn a year ago.
At the time of its Q4 19 release, Apple guided revenue to be between $85.5 billion and $89.5 billion, with gross margin between 37.5% and 38.5%.
Momentum coming into this quarter is positive – Apple posted record Q4 revenues despite slower iPhone sales and guided for a very strong holiday quarter. Earnings per share beat handsomely at $3.03 vs $2.84 expected and up 4% year on year. Revenues jumped 2% to $64bn.
On a trailling 12-month (TTM) basis Apple’s PE has soared to 25 from around 11 last year. The Services-led re-rating may have already happened, although there could yet be a little more upside.
Q1 Key themes
Coronavirus/China – investors will pay close attention to what management have to say about the impact of the virus on demand in China, as well as on operations/production. Apple may have to revise its Q2 forecasts for Greater China lower – this could be an important steer for the broader market in terms of the outbreak’s impact. Most of Apple’s products are made in China, while the country accounts for about 16% of global revenues. Chinese exposure has the potential to dent the stock whatever the Q1 earnings turn out to be if the guidance is soft.
We’ve had decent indications from the Services side of the business indicating that its pivot to being more of a Services business is in full swing. App store customers spent a record $1.42bn between Christmas and New Year, 16% up on last year, the company has said. Management also revealed that Apple News is drawing over 100m monthly active users across the US, UK, Canada and Australia. Services is accounting for an increasingly large chunk of earnings, supportive of the recent multiple expansion. However we may see margins hit by content creation investment with Apple TV+ – investors will be keen to hear how this service has performed on launch. Services growth has pulled back a touch in recent quarters and could further slow.
iPhone sales matter a lot less
The fiscal first quarter is always Apple’s strongest as it chalks up the holiday season and new iPhone models. But sales are less important than in the past. We’ll be looking for any guidance from management on the year ahead and, crucially, the potential super-cycle 5G refresh when it happens. Apple’s first 5G phones are due this year, although there is talk of delays to get the fastest devices to market, so any guidance on this will be key.
The improvement on both top and bottom line in the fiscal fourth quarter came despite a 9% drop in iPhone sales. Whilst that’s not as bad as the 15% type level seen recently, it shows how much of the lifting is now being done by other parts of the business. It suggests Apple is reaching an inflection point where it’s no longer dependent on the iPhone for EPS growth. This is across the board a positive. Indeed for 2019 as a whole, iPhone sales fell 14% but the stock was up 89%.
Apple has been increasingly talking up its Wearables business as this has been a particularly strong performer. Wearables, Home and Accessories knocked it out the park in Q4, with sales up 54% to $6.52bn. This was by far the fastest growing segment and will account for an increasing percentage of sales, currently c10%.
Q4 confirmed that the US consumer remains strong. Indeed, almost all the growth came from the Americas, which is dominated by US sales. American consumers still look in good shape. Sales in Europe, Japan and Greater China fell. We will look to the holiday quarter to see whether international demand is improving again.
Holiday quarter could be record breaking
Guidance for the fiscal first quarter was bullish, and Apple could mark a record for quarterly revenues. Apple is guiding revenue of between $85.5 billion and $89.5 billion. Early indicators suggest the iPhone11 is performing well with consumers. Favourable comparisons in China from last year are assured, given the previous year’s downswing in iPhone sales in the region.
The stock has run up quite a head of steam to top $320 before pulling back a touch. We noted on Jan 8th a potential topping pattern on the chart as it fails to make new highs and the 14-day RSI indicating overbought conditions, while noting that MACD could also be turning. Indeed since then we have seen the daily MACD turn lower below the signal line and the RSI divergence played out with a pullback last week and into this week. On a weekly chart, the RSI and MACD show the stock is hyper-extended and trading well north of its long-term moving averages. Further pullbacks could occur if the earnings are not least in line with expectations.